The proposed ban on embedded commissions was a hotly debated topic at the 2017 Inflection Point Advocis Symposium in Toronto on Tuesday.
Many cases have been made on both sides of the discussion about whether a ban on embedded commissions in investment products would be good for clients and, ultimately, the industry. Speakers at this event represented a variety of perspectives and opinions.
Peter Intraligi, president of Toronto-based Invesco Canada Ltd. said in an interview-format presentation that banning commissions would hurt small investors because they would be required to pay more money for advice, potentially creating an “advice gap” in the market. A balanced solution, he said, would be to standardize the trailer fees that are embedded in mutual funds.
“In our view,” Intraligi said, “the conflict [of interest] is created when you have a difference in fees that are being charged.”
For example, if choosing between two mutual funds with similar investment and performance styles that differ only in trailer fees, an advisor might lean toward the fund with the higher-paying trailer.
“Our view,” Intraligi said, “is that when [one standard fee] is embedded in the price of a fund — say 1% — that eliminates the potential for conflict.”
Intraligi was careful to note, however, that he is not suggesting capping advisor compensation. If an advisor provides services that exceed the 1% fee embedded in the fund, the advisor can go to fee-based platform and charge whatever he or she deems appropriate. “In our view,” he said, “it gives you some flexibility.”
In a separate panel discussion at the event, Wanda Morris, vice president of advocacy for CARP (formerly the Canadian Association of Retired Persons), refuted the idea that a standard fee would eliminate any conflicts of interest. A standard fee, Morris said, would only remove a conflict of interest within a particular product category, such as mutual funds, but not between product categories.
For example, she drew attention to the relative lack of ETF investments in Canada, which are a lower-cost alternative to mutual funds. Many clients, she said, are put into mutual funds that essentially mimic ETFs, but with a higher cost.
“Probably every week I get a letter, email or call from a [CARP] member who has not been well served by our current regulatory structure,” she said.
CARP members are largely in favour of removing embedded commissions, she added. A recent poll of CARP members revealed that 79% supported the ban on embedded fees.
“I believe I speak for [CARP members] in saying they would be more than willing to pay fees to make sure their assets are managed wisely through the decumulation stage and that they’re making the right decisions,” she added.
Lawrence Haber, a member of the Ontario Expert Committee to Consider Financial Advisory and Financial Policy Alternatives, also supported the idea of banning embedded commissions, in a separate presentation.
Haber said he does not support the suggestion that removing embedded commissions would lead to an advice gap in the market. He believes advisors could still charge fees without an embedded commission. While many in the industry have argued that clients are going to balk at fees if they’re not embedded, Haber said, advisors can soften the blow by charging fees on a monthly basis instead of in one lump sum.
For example, he said, if an advisor is receiving $600 in annual trailer fees on a $50,000 account, why not break up that amount into 12 monthly payments — of $50.
“Then you’ve charged them based on a trailer and you haven’t changed the compensation,” he said. “You’ve changed the methodology.”
“Let’s stop fighting about embedded commissions,” Haber concluded, “and move toward transparency.”